Monday, 7 November 2011

The Greek Interim Government and the Next Elections

It is perhaps the most eloquent testament to the bait-and-switch nature of politics and its specific expression in Greece that the very people who’s incompetence and venality have driven Greece into bankruptcy are now congratulating themselves on having rescued the country.

Since the dramatic vote of confidence on Friday evening and the Prime Minister’s implied resignation, Greece and its European partners are waiting for George Papandreou and Antonis Samaras to make up their minds as to the composition of a “government of national unity.” A new prime minister is finally due to be named on Tuesday morning, whereupon it is understood that George Papandreou will officially resign. This new prime minister is rumoured to be Loukas Papademas, former deputy head of the European Central Bank, but little is certain.

This new government is set to govern for a symbolic 100 days in order to implement “the decisions of the October 26th Agreement.” The specific legal requirements needed to ratify this agreement remain unknown, or at least unannounced. One wonder whether the political costs of this agreement were so high as to lead Mr. Papandreou to propose a referendum last Monday.

Without any precise information, it is nonetheless possible to hazard a guess at what kind of legal requirements will be required.

Private Sector “Haircut” and the Greek Banking System

The 50% haircut on private sector loans to Greece imply a significant write-down of assets in the Greek banking and pension systems. In order to recapitalise the Greek banking system, EUR 30 billion has been promised to Greece as part of the second bailout, of a total of EUR 130 billion. A further EUR 30 billion has been promised as a “sweetener” for the international banks participating in the process.

The Greek interim government will have to draft a banking recapitalisation law which provides for the following issues:

a.Changes to the legal basis of the remaining 50% of Greek government bonds still in private sector hands. We understand that changes to the jurisdiction of legal contracts governing these laws may be requested. Furthermore, there are issues of maturity and interest rate extension which can apparently only be implemented under a law of parliament.

b.Measures to implement the recapitalisation of the Greek banking system, such as dilution of existing shareholders; representation of government representatives on bank boards; the term of a public sector participation or “creeping nationalisation”; valuation of share capital; etc.

Greek Privatisation and Helios Project Revenues to the EFSF

The communiqué of the October 26th Agreement states that approximately EUR 15 billion in Greek privatisation revenues and revenues from the Helios solar power investments are due to be paid into the European Financial Stability Fund as a form of recapitalisation. This certainly requires an legal act.

Further Austerity Measures and Monitoring Supervision

It is clear that further austerity measures will be needed, and must be explicitly stated, as a condition for ratifying the second bail-out package (which itself requires legal acceptance). An omnibus act is likely to be passed in this respect. An important measure of this will be the acceptance of an international monitoring mission of 100-150 European “observers” offering “technical assistance” to Greek ministries for implementing the October 26th Agreement.

The 2012 Budget

The most dramatic law to be passed will be that of the 2012 budget. This will reflect further austerity and cutbacks, new taxes, and new measures. The budget must pass by December, and will provide the focal point for vitriolic political battles to come.

It is therefore clear to anyone monitoring the situation that this interim government is somewhat akin to a political special purpose vehicle (SPV). Why an SPV? Because both major parties clearly plan to position their subsequent political campaigns blaming this “off political balance sheet item.” In other words, they plan to distance themselves from the difficult measures that will be announced, blaming either “the other party” or “the interim government.” This is despite the irony that the main task of the parties at this point will be to muster the votes in Parliament to pass the laws drafted by this interim government.

This is the reason that New Democracy maintains that no “political figures” participate in the interim government. New Democracy doesn’t want its politicians serving in this government become identified with further austerity before it has its chance to fight a general election in early 2012. Even LAOS, for so long desperate for recognition, now appears to be having second thoughts as to whether its leader, George Karantzaferis, should participate.

We are also aware that although these measures will be voted in Parliament under the interim government, it is difficult to see how they will be implemented. The Greek civil service has largely shut down in most important areas as a series of strikes, occupations, slow-downs and political instability means that many critical units and individuals are no longer working. With this interim government already a “lame duck” until the next election, forecast for January 2012, it is difficult to see what will actually be done.

The economic situation in Greece is worsening, and 2012 will mark the confirmation of the Greek Economic Depression. Record numbers of businesses are closing; record numbers of Greeks are homeless or hungry; record numbers are trying to emigrate.

It is regrettable but expected that so soon after the dramatic events of last week, Greek politicians have been collectively preening themselves in front of television cameras, congratulating themselves on their new-found “cooperation” and their “new era” of political life.

As a result, it is highly likely that the 3-month interim government has been designed to pass painful laws in order to receive the 6th bailout tranche, and that the implementation of these laws will be contested in an election campaign which in essence begins tomorrow, and officially in mid-January 2012. In such an environment, it is highly unlikely that Greece will meet even its revised fiscal adjustment targets. By early January, the country and the Eurozone will find itself in the midst of yet another financial and political crisis. We can only hope that Italy does not implode by then.

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